Financial Planning and Forecasting

1
Financial Planning and Forecasting

• Chapter 16

• Forecasting Sales
• Projecting the Assets and Internally Generated
  Funds
• Projecting Outside Funds Needed
• Deciding How to Raise Funds

2
Preliminary Financial ForecastBalance Sheets
(Assets)
3
Preliminary Financial Forecast Balance Sheets
(Liabilities and Equity)
4
Preliminary Financial Forecast Income Statements
5
Key Financial Ratios
6
Key Assumptions in Preliminary Financial Forecast
for NWC

• Operating at full capacity in 2008.
• Each type of asset grows proportionally with
  sales.
• Payables and accruals grow proportionally with
  sales.
• 2008 profit margin (2.52) and payout (30) will
  be maintained.
• Sales are expected to increase by 500 million.
  (DS 25)

7
Determining Additional Funds Needed Using the AFN
Equation

• AFN (A0/S0)?S (L0/S0)?S M(S1)(RR)
• (1,000/2,000)(500)
• (100/2,000)(500)
• 0.0252(2,500)(0.7)
• 180.9 million

8
Managements Review of the Financial Forecast

• Consultation with some key managers has yielded
  the following revisions
• Firm expects customers to pay quicker next year,
  thus reducing DSO to 34 days without affecting
  sales.
• A new facility will boost the firms net fixed
  assets to 700 million.
• New inventory system to increase the firms
  inventory turnover to 10x, without affecting
  sales.

9
Managements Review of the Financial Forecast

• These changes will lead to adjustments in the
  firms assets and will have no effect on the
  firms liabilities and equity section of the
  balance sheet or its income statement.

10
Revised (Final) Financial ForecastBalance
Sheets (Assets)
11
Key Financial Ratios Final Forecast
12
What was the net investment in capital?
13
How much free cash flow is expected to be
generated in 2009?

• FCF EBIT(1 T) Net investment in capital
• 125(0.6) 225
• 75 225
• -150

14
Suppose Fixed Assets Had Been Operating at Only
85 of Capacity in 2008

• The maximum amount of sales that can be supported
  by the 2008 level of assets is

• 2009 forecast sales exceed the capacity sales, so
  new fixed assets are required to support 2009
  sales.

15
How can excess capacity affect the forecasted
ratios?

• Sales wouldnt change but assets would be lower,
  so turnovers would improve.
• Less new debt, hence lower interest and higher
  profits
• EPS, ROE, debt ratio, and TIE would improve.

16
How would the following items affect the AFN?

• Higher dividend payout ratio?
• Increase AFN Less retained earnings.
• Higher profit margin?
• Decrease AFN Higher profits, more retained
  earnings.
• Higher capital intensity ratio?
• Increase AFN Need more assets for given sales.
• Pay suppliers in 60 days, rather than 30 days?
• Decrease AFN Trade creditors supply more capital
  (i.e., L0/S0 increases).